King calls for RBS to be split up

Bank of England governor
Mervyn King
has challenged British Chancellor
of the Exchequer George Osborne
to break up the Royal Bank of Scotland to wrench the UK out of its economic torpor.

Sir Mervyn claimed that “nothing has been achieved" in the four years since RBS was rescued with £45 billion of taxpayer cash and hundreds of billions of pounds of state guarantees. The bank is failing to support small businesses, he said, and is retarding the recovery.

Laying down the gauntlet to Mr Osborne, Sir Mervyn said the government’s “arms-length" handling of the state-backed lender was “a nonsense", and that it should use its 82 per cent stake to seize control and split RBS into a “good bank" and a “bad bank".

“We’ve not been sufficiently decisive in recapitalising or restructuring it," he said.

Any further intervention would “mean accepting that there are losses" that would damage the public finances, Sir Mervyn said.

But he dismissed Mr Osborne’s concerns, expressed last week, as little more than “presentational" difficulties that would be vastly outweighed by having “a healthy RBS back lending to the economy".

“We shouldn’t worry about the consequential impact on the scale of public debt. Financial markets would see through this," he said. “We should simply accept the reality today, and the reality is that [the shares] are probably worth less than we thought."

The BoE governor has discussed his proposal with Mr Osborne, who is already under pressure from cabinet colleague Vince Cable and former chancellor Lord Lawson of Blaby to break up RBS. Treasury insiders said there was little prospect of the plans going ahead.

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Addressing the Parliamentary Commission on Banking Standards for the final time before he steps down in June, Sir Mervyn said: “I think that the whole idea of a bank that is 82 per cent owned by the taxpayer but run at arm’s length from the government is a nonsense. It cannot make any sense.

“I do not believe it’s beyond the wit of man to devise a plan to restructure RBS and divide it into a healthy well-capitalised bank capable of lending to the UK economy. It does mean accepting there are activities that are likely to generate continued losses. In that sense, it would a be a good-bank/bad-bank split."

Sir Mervyn is believed to have pushed for a split as part of the original bailout in 2008, but was overruled by then prime minister
Gordon Brown
and chancellor Alistair Darling. Yesterday, he claimed Labour had been too close to the bankers, and that the industry lobby remained overly influential.

“The regulators knew that if they were tough on the banks, they would go straight to Number 10," he said. “The climate has changed, but the access probably hasn’t."

Last week, Mr Osborne told former conservative chancellor Lord Lawson the break-up plan was “perfectly reasonable" but that “first we’d have to nationalise RBS". He added: “I’d have to justify spending perhaps £8 billion, £9 billion or £10 billion on nationalising RBS. I’d have to buy out the minority shareholders at a presumably independently agreed market price."